T.C. Summary Opinion 2007-184
UNITED STATES TAX COURT
SHARON T. MYRICK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10717-05S. Filed October 29, 2007.
Sharon T. Myrick, pro se.
Russell K. Stewart, for respondent.
PANUTHOS, Chief Special Trial Judge:1 This case was heard
pursuant to the provisions of section 7463 of the Internal
1
After the death of Special Trial Judge Carleton D. Powell
on Aug. 23, 2007, the parties were directed to file, on or before
Oct. 2, 2007, a response consenting to the reassignment of this
case or file a notice objecting to the reassignment together with
a motion for a new trial or a motion to supplement the record,
stating reasons in support of either motion. On Sept. 6, 2007,
counsel for respondent filed a response consenting to the
reassignment of this case; however, no response has been filed by
petitioner. After allowing ample time for a response to be filed
by petitioner, the Chief Judge reassigned this case to Chief
Special Trial Judge Peter J. Panuthos, for disposition on the
existing record.
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Revenue Code in effect when the petition was filed. Pursuant to
section 7463(b),2 the decision to be entered is not reviewable by
any other court, and this opinion shall not be treated as
precedent for any other case.
Respondent determined a $4,888 deficiency in petitioner’s
2001 Federal income tax and a $977.60 accuracy-related penalty
pursuant to section 6662(a). After concessions,3 the issues for
decision are: (1) Whether petitioner is entitled to deductions
claimed on Schedule C, Profit or Loss From Business; (2) whether
petitioner correctly reported gross receipts on Schedule C; and
(3) whether petitioner is liable for the accuracy-related penalty
under section 6662(a).
Background
Some of the facts have been orally stipulated and are so
found. The stipulated facts and exhibits, as well as additional
exhibits introduced at trial, are incorporated herein by this
reference. Petitioner resided in Philadelphia, Pennsylvania,
when the petition was filed.
2
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
3
Petitioner concedes in full the deductions she claimed on
Schedule A, Itemized Deductions. Respondent concedes that a
computational error of $828 was made in the notice of deficiency
to self-employment income.
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During 2001, petitioner worked for the U.S. Department of
the Treasury. She also sold products for Avon Products, Inc.
(Avon). Petitioner generally sold the Avon products from her
home, although she occasionally met customers elsewhere.
Petitioner had a desk, computer, printer, a postage meter, and
other equipment in her home.
Petitioner owned both a Chevrolet Trailblazer and a Dodge
Neon. Petitioner used the Trailblazer to commute to her job at
the Treasury Department in 2001. Petitioner also used the
Trailblazer to transport Avon products. It is not clear the
extent to which petitioner used the Neon for personal or business
purposes.
Petitioner was also involved with a company called Prepaid
Legal Services in 2001. According to petitioner, she paid a fee
that allowed her to contact Prepaid Legal Services and receive
legal advice. Petitioner used Prepaid Legal Services for both
personal and business-related matters. Petitioner became an
associate of Prepaid Legal Services in or about May 2001.
Although the record does not disclose what her duties were,
petitioner earned some amount of income from Prepaid Legal
Services after she became an associate.
In addition to the above-described activities, petitioner
attended one or more flea markets in 2001 where she attempted to
sell goods. The record contains little information about the
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extent of petitioner’s involvement with flea markets or her
success in earning income from this activity.
Petitioner attached a Schedule C to her 2001 tax return.
Except as described below, petitioner combined the income and
expenses of Avon, Prepaid Legal Services, and the flea markets on
the Schedule C. Petitioner reported $7,791 of gross receipts and
$24,171 of expenses for a $16,380 loss. Respondent did not
adjust the gross receipts. However, respondent disallowed all
but $172 of the claimed expense deductions. Petitioner filed a
timely petition for review of respondent’s determination.
Discussion
In general, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and the taxpayer bears
the burden of showing that the determinations are in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions
and credits are matters of legislative grace, and the taxpayer
bears the burden of proving entitlement to any deduction or
credit claimed on his return. See INDOPCO, Inc. v. Commissioner,
503 U.S. 79 (1992).
Pursuant to section 7491(a), the burden of proof as to
factual matters shifts to the Commissioner under certain
circumstances. Petitioner has neither alleged that section
7491(a) applies nor established her compliance with the
requirements of section 7491(a)(2)(A) and (B) to substantiate
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items, maintain records, and cooperate fully with respondent’s
reasonable requests. Petitioner therefore bears the burden of
proof.
I. Schedule C Deductions
A taxpayer who carries on a trade or business generally may
deduct ordinary and necessary expenses paid or incurred in
connection with the operation of the business. Sec. 162(a); see
also FMR Corp. & Subs. v. Commissioner, 110 T.C. 402, 414 (1998).
Personal expenses, in contrast, generally are not deductible.
Sec. 262(a). Respondent does not dispute that each of the three
activities in question qualifies as a trade or business for
Federal income tax purposes. Thus, we address only whether the
expenses petitioner claimed were ordinary and necessary, and
whether they were paid or incurred in connection with a trade or
business.
Before discussing the deductions in issue, we note that
petitioner lost a number of receipts when she accidentally threw
them away. When a taxpayer’s records have been lost or destroyed
through circumstances beyond his control, the taxpayer is
entitled to substantiate a deduction by reconstruction of his
expenditures through other credible evidence. Smith v.
Commissioner, T.C. Memo. 1998-33; see also Malinowski v.
Commissioner, 71 T.C. 1120, 1125 (1979). We do not find that
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petitioner’s records were lost through circumstances beyond her
control.
Where a taxpayer establishes that he incurred a business
expense but cannot prove the amount of the expense, the Court may
approximate the amount allowable, bearing heavily against the
taxpayer whose inexactitude is of his own making. Cohan v.
Commissioner, 39 F.2d 540, 544 (2d Cir. 1930). To apply the
Cohan rule, however, we must have a reasonable basis for
estimating the amount of the expense. Vanicek v. Commissioner,
85 T.C. 731, 742-743 (1985). We are not required to accept a
taxpayer’s unsubstantiated testimony that he is entitled to a
deduction. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986);
Hoang v. Commissioner, T.C. Memo. 2006-47.
A. Advertising
Petitioner claimed a $1,200 deduction for advertising which
respondent disallowed in full. Petitioner testified that she
incurred this expense in connection with two Internet Web sites
she maintained and brochures she distributed to potential
customers, but she provided no credible evidence to corroborate
the amount or purpose of the expense. See Tokarski v.
Commissioner, supra. Respondent’s determination on this issue
therefore is sustained.
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B. Legal and Professional Services
In general, legal fees are deductible under section 162 only
if the matter with respect to which the fees were incurred
originated in the taxpayer’s trade or business and only if the
claim is sufficiently connected to that trade or business. See
United States v. Gilmore, 372 U.S. 39 (1963); Kenton v.
Commissioner, T.C. Memo. 2006-13.
Petitioner claimed a $500 deduction for legal and
professional services, representing the fee she paid Prepaid
Legal Services for legal advice, which respondent disallowed in
full. At trial, the parties agreed that petitioner paid $358 of
that amount. Petitioner testified that she used the service for
both personal and business matters. However, the record does not
provide a reasonable basis for allocating the cost of the service
between personal and business use. We therefore do not apply the
Cohan rule, see Vanicek v. Commissioner, supra, and respondent’s
determination is sustained.
C. Supplies and Office Expense
Petitioner claimed a $1,852 deduction for supplies and a
$1,900 deduction for office expense which respondent disallowed
in full. At trial, the parties agreed that petitioner paid $472
for a postage meter, $176 for “Postal Privilege”, which
petitioner defined as the cost of postage used in connection with
the postage meter, and $270 for a water cooler. Petitioner
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provided no other receipts or canceled checks for the remaining
supplies and office expense deductions she claimed.
Petitioner credibly testified that she used the postage
meter to mail fliers and brochures to customers. Although it is
possible that petitioner used the postage meter for personal
matters, such use was likely de minimis in comparison to the
business use. We therefore conclude that petitioner is entitled
to deduct $648 for the cost of the postage meter and the “Postal
Privilege”.
Petitioner testified that she purchased or leased the water
cooler for the benefit of customers who came to her home.
Petitioner did not establish, however, that the water cooler was
used primarily by customers and not by her family. Because
petitioner has failed to meet her burden of proof, she cannot
deduct the $270 cost of the water cooler.
Respondent’s determinations with respect to supplies and
office expense is modified to the extent that petitioner is
entitled to a deduction of $648.
D. Utilities
Petitioner claimed a $2,172 deduction for utilities which
respondent disallowed in full. At trial, the parties agreed that
petitioner paid $1,311 to Verizon, presumably for telephone
service, and $243 for wireless Internet service. Petitioner did
not demonstrate that these amounts were incurred solely for
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business purposes, nor did she apportion the expenses between
personal and business use. Section 262(b) disallows any
deduction for basic telephone service as a personal expense.
Because the record does not provide a reasonable basis for
estimating the amount attributable to business purposes, see
Vanicek v. Commissioner, supra, respondent’s determination on
this issue is sustained.
E. Rent or Lease of Other Business Property
Petitioner claimed a $472 deduction for rent or lease of
other business property which respondent disallowed in full.
Petitioner did not identify the property in question or how it
relates to a trade or business. Respondent’s determination on
this issue is sustained.
F. Repairs and Maintenance
Petitioner claimed a $700 deduction for repairs and
maintenance which respondent disallowed in full, but petitioner
introduced no evidence to support the claimed deduction.
Respondent’s determination on this issue is sustained.
G. Car and Truck Expenses
Section 274(d) imposes strict substantiation requirements
for listed property, travel, entertainment, and meal expenses.
Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985). Listed property generally includes passenger
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automobiles and any other property used as a means of
transportation.4 Sec. 280F(d)(4)(A)(i) and (ii).
To obtain a deduction for such expenses, a taxpayer must
substantiate by adequate records or by sufficient evidence
corroborating the taxpayer’s own testimony the amount of the
expense, the time and place of the use, the business purpose of
the use, and, in the case of entertainment, the business
relationship to the taxpayer of each person entertained. Sec.
274(d); sec. 1.274-5T(b), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985). The Cohan rule does not apply to
expenses governed by section 274(d). Sanford v. Commissioner, 50
T.C. 823, 827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir.
1969).
Petitioner claimed a $5,338 deduction for car and truck
expenses in connection with the Trailblazer which respondent
disallowed in full.5 As discussed above, petitioner used the
Trailblazer for both personal and business purposes. When a
taxpayer uses an automobile for personal and business purposes,
only that percentage of the expenses which represents business
4
Although there are exceptions to this rule, see, e.g.,
Sullivan v. Commissioner, T.C. Memo. 2002-131 n.2, petitioner has
not argued or demonstrated that any such exception applies.
5
Although petitioner may also have used the Neon for
business purposes, she provided almost no testimony or other
evidence concerning this vehicle. We therefore confine our
discussion to the Trailblazer.
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use is deductible. See Cobb v. Commissioner, 77 T.C. 1096,
1101-1102 (1981), affd. without published opinion 680 F.2d 1388
(5th Cir. 1982). Petitioner did not keep a mileage log or
otherwise distinguish between personal and business use of the
Trailblazer. Petitioner therefore fails to meet the requirements
of section 274(d), and respondent’s determination on this issue
is sustained.
H. Depreciation and Insurance
Petitioner claimed an $8,310 deduction for depreciation and
a $1,202 deduction for insurance in connection with the
Trailblazer which respondent disallowed in full. As discussed
above, however, she failed to establish the extent to which the
Trailblazer was used for business purposes. Respondent’s
determination on this issue is sustained.
I. Travel, Meals, and Entertainment
Petitioner claimed a $279 deduction for travel and a $74
deduction for meals and entertainment expenses which respondent
disallowed in full. Petitioner testified that she incurred these
expenses when she traveled to Delaware, but she did not introduce
receipts, canceled checks, or other evidence to corroborate her
testimony. Sec. 274(d). Respondent’s determination on this
issue is sustained.
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II. Gross Receipts on Schedule C
Petitioner reported gross receipts of $7,791 on Schedule C.
During the examination of her return, petitioner indicated this
figure represented $7,055 from sales of Avon products, a $102
bonus she received from Avon, and $634 from flea market sales.
Respondent accepted the gross receipts as reported.
At trial, petitioner asserted that she had overstated gross
receipts. Petitioner’s testimony was vague, however, and she
introduced no credible evidence to indicate that the figure
reported on Schedule C was incorrect. Furthermore, petitioner
conceded that she failed to report income from Prepaid Legal
Services on Schedule C even though she reported the expenses.
Under the circumstances, we conclude that no adjustment to gross
receipts is appropriate.6
III. Accuracy-Related Penalty
Section 6662(a) provides that a taxpayer may be liable for a
penalty of 20 percent of the portion of an underpayment of tax
attributable to negligence or disregard of rules or regulations.
Sec. 6662(a) and (b)(1). Negligence includes any failure to make
a reasonable attempt to comply with the law or maintain adequate
books and records. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax
6
Although petitioner acknowledged that she did not report
income from Prepaid Legal Services, respondent did not attempt to
assert an increased deficiency. Accordingly, we do not modify
the gross receipts that were reported by petitioner and accepted
by respondent.
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Regs. Disregard of rules or regulations includes any careless,
reckless, or intentional disregard. Sec. 1.6662-3(b)(2), Income
Tax Regs. The Commissioner bears the burden of production with
respect to the accuracy-related penalty. See sec. 7491(c);
Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Petitioner concedes that she did not maintain accounting
records for her business activities or mileage logs for her use
of the Trailblazer. Petitioner also concedes that she failed to
report gross receipts from Prepaid Legal Services. Petitioner
therefore failed to make a reasonable attempt to comply with the
law or maintain adequate records, and respondent has met his
burden of production. See sec. 6662(c); sec. 1.6662-3(b)(1),
Income Tax Regs.
An exception to the section 6662 penalty applies when the
taxpayer demonstrates there was reasonable cause for the
underpayment and the taxpayer acted in good faith with respect to
the underpayment. Sec. 6664(c). Whether the taxpayer acted with
reasonable cause and in good faith is determined by the relevant
facts and circumstances on a case-by-case basis. See
Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec.
1.6664-4(b)(1), Income Tax Regs.
Petitioner testified that she had receipts for many of her
expenses but threw the receipts away when she moved her office
from one part of her house to another. Such circumstances do not
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constitute reasonable cause. Furthermore, petitioner made little
if any attempt to reconstruct the lost records. Accordingly, we
conclude that petitioner has failed to demonstrate reasonable
cause and good faith. Respondent’s determination on this issue
is sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.